ADVISORY LETTER ALL INSURERS, INSURANCE ISSUERS, HEALTH MAINTENANCE ORGNIZATIONS AND ALL PRODUCERS JAMES J. DONELON, COMMISSIONER OF INSURANCE

Transcription

1 LOUISIANA DEPARTMENT OF INSURANCE JAMES J. DONELON COMMISSIONER ADVISORY LETTER TO: FROM: RE: DATE: ALL INSURERS, INSURANCE ISSUERS, HEALTH MAINTENANCE ORGNIZATIONS AND ALL PRODUCERS JAMES J. DONELON, COMMISSIONER OF INSURANCE PRODUCER COMPENSATION; RESCISSION OF ADVISORY LETTER No The purpose of Advisory Letter No is to advise all insurers, including health maintenance organizations, and all producers licensed to do business in Louisiana of the manner in which the Louisiana Department of Insurance (LDI) addresses and shall enforce various provisions of the Louisiana Insurance Code with respect to producer compensation. The guidance contained within Advisory Letter No replaces and supersedes guidance previously issued as Advisory Letter No on August 9, All insurers and producers are hereby given notice that Advisory Letter No is rescinded. All recipients of Advisory Letter No are reminded that the term "insurer" under the Louisiana Insurance Code includes all persons engaged in the business of making contracts of insurance, except fraternal benefits societies. For clarity and brevity, health maintenance organizations are also included in the term "insurer." Similarly, the term "producer" is inclusive of agents and brokers, in accordance with La. R.S. 22:46. I. Guidance Applicable to All Insurers of Every Line of Insurance A. Producer Compensation in the Form of a Fee As defined in La. R.S. 22:1542, a commission may consist either of a percentage of the premium generated by a sold insurance policy or direct compensation as a flat fee. The Louisiana Insurance Code does not mandate that any insurer utilize one form of commission over another. Each insurer may design and utilize whatever lawful commission arrangement best fits its business model. Such lawful arrangements may P. 0. BO X BAT O N ROUGE, LOU ISIANA PHO N E {225) FAX {225)

2 Page 2 of 12 include, but not be limited to, graduated compensation or classes of producers based upon definable characteristics, whether the commission is paid as a percentage of the premium or as a flat fee. B. Quoted Premium Must Include Commission La. R.S. 22:46 defines premium as "all sums charged, received, or deposited as consideration for the purchase or continuance of insurance... " Furthermore, La. R.S. 22:855 requires that the premium quoted by an insurer shall be a specific dollar amount which shall be inclusive "of all fees, charges, premiums, or other consideration charged for the insurance... " The same statute further prohibits any insurer or any agent on its behalf from charging or receiving any fee which is not quoted in the premium. It is evident from these several statutes that regardless of which producer compensation scheme is employed by an insurer, the cost of the commission, if any, must be included in the quoted premium. Because a premium is derived from a rate, the cost to an insurer of producer compensation must be reflected in both the rate and the premium. Other sums charged to an insured by an insurer or by a producer that do not constitute a commission and are therefore excluded from the definition of premium are authorized strictly and with specificity in La. R.S. 22:855. C. Alteration of the Quoted Premium and Net of Commission Quotes Are Prohibited Implicit in the statutory scheme of the Insurance Code where an insurer is required to file rates with the LDI is the requirement that the quoted premium may not be altered except as authorized by law. Absent such authorization, no producer may alter the dollar amount or terms of the quoted premium whether the alteration is to increase the quoted premium or to reduce the quoted premium. Any such deviation or alteration of the quoted premium would result in a rate that is either unauthorized (where the LDI has approval authority over rates) and/or indicative that an unfiled rate has been used by an issuer in contravention of the Insurance Code. The term "net of commission" refers to an agreement whereby the quoted premium is reduced by an amount proposed to be the producer's commission and in doing so, the producer and the insurer have deviated from the insurance rate. Net of commission quotes violate a number of statutory provisions and constitute an unfair or deceptive trade practice under La. R.S. 22:1964, except where the Insurance Code strictly and specifically authorizes such arrangements.

3 Page 3 of 12 II. Guidance Applicable To Insurers By Lines of Insurance A. Commissions for Fire, Casualty, Surety, Fidelity, Guaranty, and Bonding Insurance The plain and unambiguous terms of La. R.S. 22:1557(C) mandate that the commission paid by each fire, casualty, surety, fidelity, guaranty, and bonding insurer shall be uniform and equal to all classes of producers. By the terms of the statute, the insurer should establish a commission schedule or schedules that define the producer compensation scheme. Furthermore, the compensation scheme must be executed in such a way that all producers that fall into a particular class of producers must receive "uniform" and "equal" commissions. The establishment of classes of producers, if desired, is at the discretion of the insurer provided that the insurer does not subvert the intent of the statute by, for example, using arbitrary or capricious standards to create pseudo classes of producers to treat similarly situated producers inequitably. B. Commissions for Major Medical Health Insurance La. R.S. 22:1568 requires that a health insurance issuer, including health maintenance organizations, establish one or more commission schedules for major medical health insurance products. 1 The schedules must be uniformly applied to all producers within the same schedule. The LDI has provided extensive guidance on its enforcement of La. R.S. 22:1568 in Advisory Letter No , issued on May 2, Health insurance issuers are advised to consult Advisory Letter No for compliance with La. R.S. 22:1568. The provisions of the statute do not apply to "ancillary" 1 Although major medical health insurance coverage may not be expressly defined by the Louisiana Insurance Code, the concept is discernible from both the context and structure of both state and federal laws and regulations. If a particular form of health insurance coverage is subject to the requirements of the Health Insurance Portability and Accountability Act of 1996 (for example, with respect to the guaranteed availability and guaranteed renewability provisions of said act), and especially if a particular form of health insurance coverage is subject to the requirements of Title I of the Affordable Care Act, then it can be properly said to be "major medical" health insurance coverage. Limited benefits products, supplemental insurance products, or other forms of excepted benefits or income replacement do not constitute major medical coverage and are, therefore, exempt from most provisions of Title XXVII of the Public Health Service Act (PHSA), Part 7 of the Employee Retirement Income Security Act (ERISA) and Chapter 100 of the Internal Revenue Code (the Code). Such benefits are defined in Section 2791 of the PHSA, Section 733 of ERISA, and Section 9832 of the Code.

4 Page 4 of 12 health products, which are also sometimes called supplemental benefits or limited or excepted benefits. 2 C. Negotiability of Commissions in Certain Lines of Insurance and the Effect of the Cost of Commissions on Rates It is imperative that insurers note that the guidance contained under this heading, Part II. C of this Advisory Letter, is inapplicable to the following lines of insurance: major medical health 3, fire, casualty, surety, fidelity, guaranty, and bonding. For purposes of this Advisory Letter, the aforementioned lines shall be referred to as "enumerated lines." 4 Any line of insurance, other than an enumerated line, may refer to Part II.C for guidance. Several questions have arisen regarding producer commissions for policies sold outside of the enumerated insurance lines. Those questions are 1. Are insurers transacting business in a line of insurance, other than an enumerated line, required to establish commission schedules? If such insurers are required to establish commission schedules, what rules for the establishment of those schedules are applicable? 2. To what extent may producers and insurers, other than in an enumerated line, negotiate commissions? 3. Can the premium charged to a policyholder, in a line other than an enumerated line, be directly affected by the compensation of the policyholder's agent? For 2 La. R.S. 22:1061 enumerates types of health and accident insurance coverage that are excepted from the requirements of Subpart C of Part Ill of Chapter 4 of the Louisiana Insurance Code, entitled "Assuring Portability, Availability, Renewability of Health Insurance Coverage", enacted by Louisiana ACTS 1997 No. 1138, which codified parts of the Health Insurance Portability and Accountability Act of 1996, Public Law , in Louisiana law. 3 The guidance contained in Part II.C of Advisory Letter , although inapplicable to major medical health insurance, is otherwise applicable to all other health insurance products-supplemental, limited, or excepted benefits-such as dental, vision, hospital indemnity, specified disease, etc. 4 The term "enumerated line" is used because La. R.S. 22:1557(C) enumerates six lines of insurance-fire, casualty, surety, fidelity, guaranty, and bonding, and requires that commissions for those lines be uniform and equal as to all classes of producers. La. R.S. 22:1568 imposes a similar uniformity requirement for classes of producers for major medical health insurance products. Because the two cited statutes enumerate specific lines of insurance, the express mention of those lines automatically excludes application of the statutes to non-enumerated lines under the canon of statutory interpretation known as expressio unius est exc/usio alterius.

5 Page 5 of 12 example, can the premium charged to a policyholder be lower if an agent accepts a 5% commission rather than a 10% commission? Regarding the questions posed in Question One, insurers transacting business in any line, other than an enumerated line, may elect to establish commission schedules. There is no statutory requirement in the Insurance Code that such insurers must establish schedules, nor is there any statutory or regulatory rule specifically governing the method by which such insurers design commission schedules. With respect to Question Two, insurers and producers transacting business in any line other than an enumerated line have the freedom to negotiate producer commissions. The Insurance Code does not require any official or standard commission, nor is there any regulatory rule that would interfere with market dynamics in the payment of producer compensation. Absent such requirements, insurers and producers may engage in negotiations for producer compensation. Finally, the answer to Question Three is more nuanced. The premium charged to a policyholder in a line other than an enumerated line can be directly affected by the cost of the compensation of the policyholder's agent, provided that any rate filings for the product sold include a rating methodology or formula that allows for a negotiated commission. Currently, some insurers have filed rates with the LDI that arrive at a final rate, and therefore a quoted premium, that is calculated by a formula that includes a variable for producer commissions. The use of such a formula allows a policyholder's quoted premium to be affected by the cost of the producer's commission. Where an insurer utilizes a rating methodology that does not include a variable formula with respect to producer commissions, the quoted premium cannot be affected by the cost of the producer commission, and any agreement to reduce the quoted premium due to the producer's compensation would constitute a net of commission quote, and rebating under La. R.S. 22:1964, and may potentially violate other provisions of the Insurance Code. In order to illustrate the principle, returning to the example in Question Three above, if an insurer has filed a rate that includes a methodology that allows for variable commissions in an non-enumerated line such as a limited benefits health policy, a policyholder's quoted premium could be a lesser amount if the policyholder's producer accepted a commission of 5% as opposed to a commission of 10%. In this example, the reduction in the quoted premium due to a lower commission would not constitute rebating under the Unfair Trade Practices Act, La. R.S. 22: , because the final quoted premium is directly derived from the filed rates that contain a variable formula, and therefore, by definition, there can be no "rebate of premiums" that would constitute

6 Page 6 of 12 rebating under La. R.S. 22:1964. Similarly, in such an example, the reduction in the quoted premium would not violate La. R.S. 22:34, which prohibits insurers from unfair discrimination in favor of individuals or persons, or between insureds or subjects of insurance having substantially like insuring risk, and exposure factors, or expense elements. La. R.S. 22:34 would not be contravened because it is fair for a policyholder to pay more or less for insurance if the expense of his insurance policy is more or less due to the cost of the producer's compensation. Conversely, an insurer may choose, at its option, not to utilize such a rating methodology and can instead spread the cost of producer compensation across its risk pool. Attached to Advisory Letter No are selected provisions of the Louisiana Insurance Code that have been referenced in this Advisory Letter. For questions regard ing Advisory Letter No , please contact the Louisiana Department of Insurance, Division of Legal Services, by telephone at (225) Baton Rouge, Louisiana, this 3rd day of June MISSIONER OF INSURANCE

7 Page 7 of 12 Selected provisions of Title 22 of the La. Revised Statutes of 1950 La. R.S. 22:34 Discrimination prohibited No insurer shall make or permit any unfair discrimination in favor of particular individuals or persons, or between insureds or subjects of insurance having substantially like insuring risk, and exposure factors, or expense elements, in the terms or conditions of any insurance contract, or in the rate or amount of premium charged therefor, or in the benefits payable or in any other rights or privileges accruing thereunder. This provision shall not prohibit fair discrimination by a life insurer as between individuals having unequal life expectancies. La. R.S. 22:46 General definitions In this Code, unless the context otherwise requires, the following definitions shall be applicable: * * * * * * (13) "Premium" means all sums charged, received, or deposited as consideration for the purchase or continuance of insurance for a definitely stated term, and shall include any assessment, membership, policy, survey, inspection, service or similar fee or charge made by an insurer as a part of the consideration for the purchase or continuance of insurance. The term premium, as used in R.S. 22:885(8) and 887(0), shall not include any assessment, membership, policy, survey, inspection, service, or similar fee or charge made by an insurer as part of the consideration for the purchase or continuance of insurance. La. R.S. 22:855 Quoted premium shall include all charges; dollar amount required

8 Page 8 of 12 A. The premium quoted by the insurer shall be a specific dollar amount which shall be inclusive of all fees, charges, premiums, or other consideration charged for the insurance or for the procurement thereof, except that: (1) In any subsequent modification of the policy, the insurer may require that evidence of insurability be furnished at the insured's expense. (2) The premium and premium tax on a surplus lines policy shall be separately stated on the declaration page. 8.(1) No insurer or its officer, employee, producer or other representative shall charge or receive any fee, compensation, or consideration for insurance which is not included in the premium quoted to the insured and the premium specified in the policy delivered to the insured, except for the premium tax on a surplus lines policy which shall be separately stated, and except for reimbursement for expenses due the producer, and except for an agency fee, if any, as authorized hereunder. (2)(a) The producer may receive reimbursement from the insured for expenses incurred by the producer directly related to the insurance coverage for the insured. In addition, the producer may charge a reasonable agency fee related to the services provided by the producer. Any reimbursement or agency fee shall be itemized separately on an invoice statement. A single invoice may be used to make known all charges. Each such charge must be prominently disclosed and itemized separately on the invoice. (b) The reimbursement for expense and agency fees shall not be considered premium for any purpose, nor shall they be subject to premium taxes or surplus lines premium taxes. Agency fees for criminal bail bond, homeowners insurance, or personal automobile insurance that are standard risks insurable at standard rates shall not exceed twenty-five dollars. (c) The commissioner of insurance may promulgate rules to enforce the provisions of this Section. C. Each policy delivered to the insured shall have the full and accurate dollar amount of the premium disclosed on the policy, which shall be inclusive of all fees, charges, premiums, or other consideration charged for the insurance or for the procurement thereof, except that, in any subsequent

9 Page 9 of 12 modification of the policy, the insurer may require that evidence of insurability be furnished at the insured's expense, and except that the premium tax on a surplus lines policy shall be separately stated, and except for reimbursement of expenses and agency fees as authorized in Paragraph (8)(2) of this Section. 0.(1) Any person who aids, assists in, or procures the preparation of any invoice, insurance policy or part thereof, or any other document used in the charging of any fee, compensation, or other consideration, except as provided in Subsections Band C of this Section, which is not included in the premium quoted by the insurer and in the premium disclosed on the policy shall be liable to the insured. (2) In this Subsection, a person who procures the preparation of any document specified in Paragraph (1) of this Subsection includes a person who knowingly permits the preparation of such a document to be done or participated in by a subordinate or employee, whether or not that person directly ordered or caused the subordinate or employee to prepare the document. It shall not include a person furnishing typing, reproducing, or providing other clerical or mechanical assistance with respect to a document. E.(1) Upon making a written finding that an amount in excess of the quoted premium has been received, the commissioner shall issue a written order to the person who received the excess amount to refund it to the person who paid it. Such amount shall be paid within thirty days after the date of the commissioner's order in the matter. (2) Upon such determination, the person ordered to pay the refund may appeal to the Nineteenth Judicial District Court after paying to the commissioner a sum equal to one-half of the assessed refund. The commissioner shall keep any such sum paid in escrow and shall return it promptly to the payor if he prevails in the court proceeding. Thirty days after the commissioner's written findings or thirty days after final denial of the appeal, any order of the commissioner made pursuant to this Section shall be enforceable as a judgment under the Code of Civil Procedure.

10 Page 10 of 12 F. Each violation of Subsection B or C of this Section shall be theft and a violation of R.S. 14:67. G. The commissioner may assess one or more of the following penalties against any person who violates the provisions of this Section: (1) A fine in an amount not greater than five thousand dollars. (2) A suspension of an insurer's certificate of authority or a producer's license. (3) A revocation of an insurer's certificate of authority or a producer's license. H. The provisions of this Section shall apply to all policies except life, annuity, and reinsurance policies. La. R.S. 22: 1542 Definitions As used in this Subpart, unless the context requires otherwise, the following definitions shall be applicable: * * * * * * (3) "Commission" shall mean a fee paid to an insurance producer as a percentage of the premium generated by a sold insurance policy, or direct compensation or reward of a producer when the same is calculated as a flat fee or as a percentage of the premium or on the profit to the principal. La. R.S. 22:1557(C) * * * * * * Commissions * * * * * * C. The commission paid by each fire, casualty, surety, fidelity, guaranty, and bonding insurer doing business in this state to its producers

11 Page 11 of 12 in this state shall be uniform and equal as to all classes of producers of such insurer throughout this state. La. R.S. 22:1568 * * * * * * Producer compensation for sales of health and welfare plans A. A health insurance issuer shall establish one or more schedules of commission for the sale of each health insurance product by an insurance producer. Such schedules of commission shall be uniformly applied to all producers within the same schedule and shall be payable to all insurance producers licensed and appointed to sell the health insurance products of the issuer. The provisions of this Subsection shall not apply to any employee welfare benefit plan exclusively regulated by the United States Department of Labor pursuant to Section 514 of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1144, or Section 4 of the same act, 29 U.S.C B. In addition to a commission for a health insurance product, a health insurance producer may negotiate a charge, fee, or any other form of compensation directly with the plan sponsor or employer group. C. Each health insurance contract entered into prior to June 14, 2013, shall comply with the provisions of this Section at the annual anniversary or renewal date following June 14, This Section shall apply to political subdivisions as defined by R.S. 42:1102, except for any political subdivision that had a contract on June 14, 2013, with an insurance producer or health insurance plan on a net of commission or stipulated fee basis for the placement of group health insurance coverage. La. R.S. 22:1964(8) Methods, acts, and practices which are defined as unfair or deceptive The following are declared to be unfair methods of competition and unfair or deceptive acts or practices in the business of insurance:

12 Page 12 of 12 * * * * * * (8) Rebates. Except as otherwise expressly provided by law, knowingly permitting or offering to make or making any contract of insurance including life insurance, life annuity or health and accident insurance, or agreement as to such contract other than as plainly expressed in the contract issued thereon, or paying or allowing, or giving or offering to pay, allow, or give, directly or indirectly, as inducement to such insurance, or annuity, any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract; or giving, or selling, or purchasing or offering to give, sell, or purchase as inducement to such insurance or annuity or in connection therewith, any stock, bonds, or other securities of any insurer or other corporation, association, or partnership, or any dividends or profits accrued thereon, or anything of value whatsoever not specified in the contract.